The economic outcomes of a close call election

FX360

AS AMERICANS go to the polls to decide their President for the next four years, the race is at deadlock, with both candidates still in pursuit of every possible vote. Once the ballots have been counted in the early hours of tomorrow morning, it is hard to imagine that there won’t be some degree of momentum injected into bonds, the dollar, and a select band of stocks that stand to win – or lose – depending on the policies that will be rolled out by the next administration.

History has shown that the US economy and Wall Street do better under a Democrat government. But there are also plenty of corporates that would benefit if the Republican challenger Mitt Romney comes out on top. Consider the railroad firm CSX, which published a mixed bag of results just last month, with tumbling shipments of coal the biggest contributing factor. Barack Obama’s green policies are likely to make it harder for operations like coal-fired power stations to function economically in the future, meaning that shipping volumes in this market will continue to slide. A more hands-off approach from Romney, however – based on the lowest cost solution to driving US economic recovery and his public declaration that he likes coal – would arguably put the likes of CSX very much back in favour.

The future size of the US military is another key area of contention. President Obama wants to scale back the size of the Army and Marine Corps by 100,000, whereas Romney wants to increase the military budget by $2 trillion (£1.2 trillion) over the next decade. That’s a huge investment and one that would directly benefit a whole raft of US defence manufacturers, including Boeing, Honeywell, Northrop and Lockheed Martin.

If there’s one single policy that has defined the Obama presidency so far, however, it must be his signature healthcare laws, commonly referred to as Obamacare. When they were challenged – and subsequently upheld – by the Supreme Court in the summer, the market reaction couldn’t have been more telling. The major listed healthcare companies, like Quest Diagnostics and Laboratory Corp of America, saw their shares jump sharply off the back of the news. In contrast, insurance companies – faced with added burdens – saw their share prices tumbling. Romney has made it quite clear that, on day one, he will act to repeal the Affordable Care Act (to give Obamacare its proper name). So again, there’s a swathe of listed entities that will stand to see definitive price action depending on who emerges victorious on Wednesday.

Looking beyond specific equities, there’s also that looming question of the fiscal cliff. If a Romney wins, it is likely that Bush-era tax breaks will be extended. And although mounting debts cannot be eradicated, the risk of the fiscal cliff happening will at least be deferred. Tax breaks should also prove attractive for corporate USA as a whole. So at least in the short term, equity markets should continue to find favour. Bond markets, however, concerned about continuing debt, would likely start demanding a higher premium.

The greenback flies in the face of the obvious correlation with deficits; in the event of his election Romney would be expected to take a more hawkish tone over monetary policy. Clearly this would do little for boosting exports – or discouraging consumers from importing more – but the longer term path for the greenback is harder to call.

Despite the assumption among some pundits that the presidential race is over, the majority seem to agree that it is still far too close to call. One thing is clear however – regardless of which way the American people vote, the potential trading opportunities will abound.